Will the Chan Zuckerberg Initiative Change Philanthropy?

A few weeks ago, an extremely wealthy California couple pledged nearly all of their current and future billions to good works, and much of the world responded with deep cynicism.

The couple, of course, is Priscilla Chan and Mark Zuckerberg, who hit the big “share” button when they said they would, during their lifetimes, give 99% of their Facebook shares — currently valued at about $45 billion — “to join many others in improving this world for the next generation.”

The announcement, made by the Facebook co-founder on his Facebook page on Giving Tuesday, carried scant details, and drew intimations that the move was meant to dodge taxes, and that the legal structure the couple was setting up — a Limited Liability Corp., or LLC — would mean less transparency about the movement of all that money.

“Priscilla and I are so happy to welcome our daughter Max into this world!” Zuckerberg wrote on his Facebook page. “For her birth, we wrote a letter to her about the world we hope she grows up in. It’s a world where our generation can advance human potential and promote equality — by curing disease, personalizing learning, harnessing clean energy, connecting people, building strong communities, reducing poverty, providing equal rights and spreading understanding across nations.”

As for such idealism, many bloggers and journalists weren’t having any of it. John Cassidy wrote in The New Yorker that nothing less than the future of democracy was at stake: “The more money billionaires give to their charitable foundations, which in most cases remain under their personal control, the more influence they will accumulate. And relatively speaking, anyway, the less influence everybody else will have.”

Of course, billionaires don’t need foundations to accrete influence, and industrialists like Andrew Carnegie and Enoch Pratt long ago took it upon themselves to decide what was best for the American people by building free libraries, hospitals and schools. And while the Chan Zuckerberg Initiative warrants scrutiny, experts say, its ultimate structure — not to mention impact — remains to be seen.

“Until the money goes to work, we won’t really know how far they are getting in achieving the goals they say they want to achieve. We have intent. We have structure. We don’t have anything else yet.” –Katherina M. Rosqueta

“Lots of people are opining about what it can mean or not mean, but these are very early days,” says Katherina M. Rosqueta, founding executive director of Penn’s Center for High Impact Philanthropy. “What’s newsworthy is you’ve got a young, wealthy couple who in a very high profile way made a pledge and talked about the kinds of things they’re interested in.”

Unlike the Giving Pledge, the Bill Gates and Warren Buffett-led campaign where pledgers are asked to commit to give most of their wealth away philanthropically, often through a foundation, the Chan Zuckerberg Initiative is getting attention because “the structure is a bit unorthodox,” Rosqueta notes.

“They haven’t done anything yet,” she adds. “People might be concerned about what they might do. But until the money goes to work we won’t really know how far they are getting in achieving the goals they say they want to achieve. We have intent. We have structure. We don’t have anything else yet.”

A Flexible Structure

That structure, an LLC, is indeed unusual in philanthropy, but not without precedent. Pierre Omidyar, founder of eBay, and his wife, Pam, established the Omidyar Network in 2004, operating both a foundation and an LLC, and Laurene Powell Jobs, widow of Steve Jobs, channels giving through an LLC called the Emerson Collective. No one knows how Chan and Zuckerberg’s full organizational map might look. “The Chan Zuckerberg Initiative highlights one of many ways for structuring charitable giving. As their goals continue to take shape, this initial decision won’t preempt them from forming charitable entities in the future,” says Jesse Salazar, a spokesman for the Council on Foundations. Indeed, the couple already has a donor-advised fund at the Silicon Valley Community Foundation.

LLC guidelines vary by state, but the LLC structure gives Chan, 30, and Zuckerberg, 31, the freedom to engage in advocacy, lobbying and to make political donations. It has fewer reporting requirements than a traditional foundation and grants the ability to potentially invest in, and sell, start-ups that aim to address societal ills.

“It’s clear that the landscape of social impact is changing. Individuals are thinking about all the ways they can create impact — through their philanthropy, their investments and their political activism,” says Wharton management professor Katherine Klein, vice dean of the Wharton Social Impact Initiative. “What’s newest among these strategies is impact investing. Certainly, Zuckerberg and Chan have left the door open to using their investments in for-profit companies to advance social missions. We are seeing growth in this space and increasing evidence of positive economic and social returns in the U.S. and abroad from investments in mission-driven companies.”

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Still, says Klein: “There is no question that it is in the government’s interest to encourage charitable giving. Giving strengthens the nonprofit sector and spurs innovation in the space. Moreover, giving helps to knit our society together. Thoughtful giving requires givers to reflect on their goals and values — on what and whom they want to benefit and why. In this sense, the decision to give at once reflects empathy and creates empathy.”

Leslie Lenkowsky, professor of public affairs and philanthropic studies at the Lilly Family School of Philanthropy at Indiana University-Purdue University-Indianapolis, calls the Zuckerberg announcement “the most significant move away from the traditional philanthropic model and toward a new, certainly not proven, and not entirely clear, model.”

What is clear is that by establishing an LLC, Chan and Zuckerberg are maintaining both flexibility and control over a number of important factors. While the kind of foundation that maintains an endowment is required to pay out at least 5% of investment income each year to recipients identified as tax-exempt under IRS guidelines, the Chan Zuckerberg Initiative plans to operate by a broader set of “philanthropic, public advocacy and other activities for the public good,” according to Facebook’s 8-K report with the SEC.

Significantly, the structure also allows Zuckerberg to maintain control of Facebook. The SEC filing states intentions for only the next three years, to sell or gift no more than $1 billion in Facebook stock each year. But if Zuckerberg were using his Facebook stock to start a foundation with a large endowment, he would have to do a lot of selling, says Lenkowsky. “Under American law, if I took $30 billion from the company I worked hard to build and put it into a foundation, I would have to sell off most of those stocks in my own company, my own holdings, and invest in some other set of companies.”

“Thoughtful giving requires givers to reflect on their goals and values — on what and whom they want to benefit and why. In this sense, the decision to give at once reflects empathy and creates empathy.” –Katherine Klein

According to Lenkowsky, that is due to the excess holdings rule stating that any principals associated with a foundation cannot hold more than 20% of outstanding shares of a publicly traded corporation. “So by putting his own stock in a foundation, he would have to give up some control of Facebook. In an LLC, he doesn’t have to sell any of them, so he remains in control.”

The move by Chan and Zuckerberg highlights “the gap that exists between what innovative philanthropists are doing personally, on a grassroots level, and our tax code, which is binary. Under the current federal tax code, an activity is either charitable or not, taxable or tax-exempt,” says charitable and non-profit attorney Laura Solomon of Laura Solomon, Esq. & Associates in Ardmore, Pa. “Right now, if you want to do some innovative social enterprise or advocacy work, you face limitations within traditional notions of philanthropy.”

This means you may need to create parallel charitable and for-profit entities, a 501c3 (charity) with a 501c4 (social welfare organization), or a charity and separate 527 political action committee, Solomon notes. “By putting money in an LLC, Zuckerberg and Chan are allowing themselves to do any and all of those things. Basically they are saying, ‘We’re not going to fit into any box right now. Instead, we are going to think more broadly and flexibly about how to achieve our philanthropic goals.’”

As for the reduced LLC requirements for disclosing where the money is coming from and going to, several experts point out that Chan and Zuckerberg have one obvious option open to them: They can simply choose to disclose this information themselves on the organization’s website and in annual reports.

Philanthropy — More and Faster

No matter how visible the Chan Zuckerberg Initiative ultimately ends up being, it will, by one measure, play but a small role in philanthropy. Americans gave a total of $358.38 billion to charity in 2014, the fifth consecutive year of increasing generosity, according to the Giving Institute’s Giving USA report released in June. Nearly three-quarters of that came from individuals, with 15% coming from foundations. While mega-gifts from tech entrepreneurs like Zuckerberg boosted the total, the increase in giving would have occurred even without those gifts. If Zuckerberg wants to have real impact, he will have to enlist the help of others.

“He could take a company public and start getting investors in to leverage his money. That $45 billion is a lot of money, but if you’re going to fix the problems of the world, it’s not that much, so he might get other investors,” says Lenkowsky. And that might account in part for the LLC structure and its lower public disclosure requirements. “As with any investment, there are phases in any start up when you don’t want a certain amount of information public,” continues Lenkowsky. Some government regulations, in fact, put constraints on public statements, notably the “quiet period” around a public offering.

Zuckerberg has already indicated a novel philanthropic vision. He argues that problems that will take decades to solve are dramatically underinvested — medical research, developing clean energy, the modernization of schools and systemic issues around poverty and justice. “There is a long list of these opportunities,” he wrote in a December 4 Facebook post. “The role of philanthropy is to invest in important areas that companies and governments aren’t funding — either because they may not be profitable for companies or because they are too long term for people to want to invest now.”

“Right now, if you want to do some innovative social enterprise or advocacy work, you face limitations within traditional notions of philanthropy.” –Laura Solomon

Bringing this kind of ambition to philanthropy could be efficacious, says Richard Henriques, a senior fellow at the Center for High Impact Philanthropy and former CFO of the Bill & Melinda Gates Foundation. “You have this pledge that one could argue is accelerated,” he notes. “It has the potential to pull more money explicitly to philanthropy than would otherwise be the case, and in the other model, people wait until toward the end of their lives before becoming involved in philanthropy.”

Discussion of Chan and Zuckerberg’s influence, whatever the pace, will likely continue in tandem with their spending. “The political question of whether we should allow large tax deductions for charitable donations is separate from the ethical question of whether individuals should use the tax deduction our system currently allows,” says Wharton professor of legal studies and business ethics Robert Hughes. “You could reasonably think that our system gives wealthy individuals too much influence on how resources are used while also thinking it is good for wealthy individuals to give large sums to worthy causes and to use available tax deductions to facilitate their gifts.”

In some areas, private charity is not an adequate substitute for governmental responsibility, he says. “For example, government has a duty to provide public support for citizens who cannot support themselves either through work or through their own resources. If people who cannot support themselves are dependent on private charity, this dependence gives financially better-off people too much power over their fellow citizens.”

Many political philosophers have defended this view, notably including Immanuel Kant, Hughes notes. “Of course, this doesn’t mean that if the government fails to support the poor adequately, better-off citizens should not step in and help.”

Braggarts and Curmudgeons

Many say that the Chan-Zuckerberg announcement is already having impact — on public opinion. Any pledge on this scale helps to put philanthropy right up there as an important value alongside capitalism and innovation, especially to younger capitalists who look up to Zuckerberg. “It’s a very strong signal,” says Wharton professor of marketing Deborah Small. “Philanthropy is nothing new, but the magnitude of it sets a high bar. Other billionaires will look stingy and greedy by comparison if they do not keep up with this norm. It’s particularly significant given the visibility of Facebook.”

“I love this gift. It’s really a millennial moment,” says Eileen R. Heisman, president and CEO of the National Philanthropic Trust and lecturer for Wharton’s Nonprofit Board Leadership Program. “They are saying, ‘We want to do social change, but not all inside the charitable structure. We want to do impact investing, and we want all the flexibility to do good and do advocacy and not be hampered by charitable restrictions.’ Baby boomers like to put things in silos — it’s for-profit, it’s non-profit — and millennials don’t like those silos. People should be able to make the world a better place in the way they feel most useful.”

Kent Smetters, Wharton professor of business economics and public policy and interim faculty director of the Penn Wharton Public Policy Initiative, says he interprets the Chan Zuckerberg Initiative “as basically Chan and Zuckerberg putting themselves under a 99% tax, versus the current 23.8% tax rate, in exchange for having more control over how the money is spent.” To the extent that the Initiative is spending on things that the government is already spending on, like New Jersey schools, the final budget is fungible — i.e., the government can just cut back — and so the only thing the Initiative gets is some personal branding, Smetters notes. “To the extent that they spend on other things, my guess is that they are picking up important things that would be otherwise underrepresented in the political process.”

But do the announcement and Zuckerberg’s subsequent elaborations though his Facebook posts also constitute a form of marketing for him and his company? “It is hard to claim that anything is ever truly pure altruism,” notes Small. “There are many benefits that can motivate and result from doing good. The tax breaks and the tax structure around this are complicated, but Zuckerberg’s gains go beyond any financial incentive.”

“Baby boomers like to put things in silos — it’s for-profit, it’s non-profit — and millennials don’t like those silos. People should be able to make the world a better place in the way they feel most useful.” –Eileen R. Heisman

The success of Facebook and of Zuckerberg’s personal brand depends critically on his image, Small adds, noting that being perceived as a generous person is very important. “Consider the greedy, selfish portrayal of Zuckerberg in The Social Network,” she says. “He’s come a long way since then through his philanthropy, through a very positive portrayal as a supportive boss in Sheryl Sandberg’s best-seller Lean In, and through his recent proclamations supporting parental leave policies and also supporting the Muslim community following Donald Trump’s caustic statements.”

In “The Braggart’s Dilemma: On the Social Rewards and Penalties of Advertising Prosocial Behavior,” published by the American Marketing Association’s Journal of Marketing Research, Small and co-authors Jonathan Berman, Emma Levine and Alix Barasch found that advertising one’s good deeds — i.e., bragging — can both help and hurt a reputation. “It helps because it is just marketing — getting the word out. If no one knows you did good, you do not get any credit at all,” Small says. “However, bragging can also hurt because it signals that the motive is impure” – for example, some may think that perhaps Zuckerberg is just doing this for the credit. Therefore, bragging pays off in situations for which it provides new information. That is, if people already think you are a good person, then bragging about it does not provide any new information about your behavior but only signals a selfish motive. In one study, the researchers found that an investment banker was perceived as generous after bragging about a donation, but not so for a social worker. “The social worker is already believed to be generous, so she doesn’t benefit from advertising it,” Small notes. “Mark Zuckerberg is likely more similar to the investment banker in this scenario.”

But there has been a knee-jerk negative reaction to a decision to apply $45 billion to making the world better — as there were to several other recent gifts, such as David Geffen’s $100 million pledge for renovations and the renaming of Avery Fisher Hall. Why? Part of it is the times, says Rosqueta. “These very large gifts by billionaires are being made in a context of increasing income inequality, and one hypothesis is that part of the negative reaction is coming from that. There is also a concern coming from the Citizens United decision that allows for more influence from corporations and wealthy individuals in the public as well as private sector.”

But playing the curmudgeon is also part of a great American tradition, says Lenkowsky. “On the one hand,” he notes, “Americans want wealthy people to do things for public good with their wealth, so there’s a lot of encouragement for that in the tax law. On the other hand, when they do act philanthropically we often criticize what they do. It’s the old story — I can spend your money better than you can.”

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